Bhilwara Spinners Ltd Upgraded to Sell on Improved Fundamentals and Valuation

Quality Grade Improvement: A Shift to Average

The upgrade in Bhilwara Spinners’ quality grade is primarily driven by its robust long-term growth figures and improved operational metrics. Over the past five years, the company has delivered a remarkable sales growth rate of 52.57% and an EBIT growth of 43.71%, underscoring strong top-line and operating profit expansion. These figures compare favourably within the Garments & Apparels sector, where many peers have struggled to maintain consistent growth.

However, some financial efficiency ratios remain subdued. The average EBIT to interest coverage ratio stands at a modest 0.47, indicating limited cushion to service interest expenses. The company’s debt metrics also highlight elevated leverage, with an average Debt to EBITDA ratio of 30.67 and a Net Debt to Equity ratio of 0.93, signalling a relatively high debt burden. Despite this, the absence of pledged shares (0.00%) and a reasonable institutional holding of 0.86% provide some comfort regarding ownership stability and governance.

Profitability ratios remain a concern, with an average Return on Capital Employed (ROCE) of -0.28% and Return on Equity (ROE) of 3.54%, both reflecting low returns relative to invested capital and shareholders’ funds. Nonetheless, the company’s tax ratio at 100% and a zero dividend payout ratio suggest a conservative approach to earnings retention and tax compliance.

When benchmarked against peers such as Indiabulls and India Motor Part, which hold average quality grades, Bhilwara Spinners’ upgrade to average quality places it in a more competitive position within its industry segment.

Valuation Grade Upgrade: From Very Expensive to Fair

Bhilwara Spinners’ valuation grade has improved significantly, moving from very expensive to fair. This shift is underpinned by a more reasonable price-to-earnings (PE) ratio of -39.46, which, while negative due to recent losses, indicates a valuation discount relative to peers trading at substantially higher multiples. The company’s price-to-book value stands at 2.50, suggesting moderate premium over book value but far less stretched than many competitors.

Enterprise value (EV) multiples also support the fair valuation assessment. The EV to EBIT ratio is 43.87, and EV to EBITDA is 21.75, both reflecting a more balanced pricing compared to the sector’s very expensive stocks. The EV to capital employed ratio of 1.47 further confirms that the market is valuing the company’s capital base more reasonably than before.

Despite a PEG ratio of zero, reflecting no earnings growth expectation currently, the latest ROCE of 1.23% and a negative ROE of -6.34% highlight ongoing profitability challenges. Nevertheless, the stock’s current price of ₹119.00, trading near its 52-week low of ₹98.90 and well below the 52-week high of ₹158.00, indicates a valuation discount that may appeal to value-oriented investors.

Financial Trend: Mixed Signals Amidst Growth and Debt Concerns

While Bhilwara Spinners has demonstrated healthy long-term growth, with net sales increasing at an annualised rate of 52.57% and operating profit (EBIT) growing at 43.71%, recent financial trends present a more nuanced picture. The company reported positive quarterly results for Q3 FY25-26, with net sales of ₹37.24 crores, PBDIT of ₹4.45 crores, and PBT less other income at ₹0.74 crores, marking the highest levels in recent quarters.

However, management efficiency remains a concern. The company’s average ROCE is a low 0.68%, indicating limited profitability generated from the capital employed. Additionally, the high Debt to EBITDA ratio of 15.32 times signals a stretched ability to service debt, raising questions about financial risk and sustainability.

Shareholder returns have also been disappointing over the past year, with the stock delivering a negative return of -20.56%, significantly underperforming the BSE500 index’s 5.79% gain. This underperformance is compounded by a sharp decline in profits, which fell by 279.6% over the same period, reflecting operational and market challenges.

Technical Analysis: Stability Amid Volatility

Technically, Bhilwara Spinners’ stock price has shown some resilience despite volatility. The current price of ₹119.00 is unchanged from the previous close, with intraday trading ranging between ₹118.00 and ₹123.00. The stock’s 52-week trading range of ₹98.90 to ₹158.00 indicates significant price fluctuations, but recent price action suggests a consolidation phase near the lower end of this range.

Over various time horizons, the stock’s returns have been mixed. It has outperformed the Sensex over one month (+15.25% vs. -4.67%) and year-to-date (+14.53% vs. -5.28%), but lagged over one week (-3.92% vs. -1.00%) and one year (-20.56% vs. +5.16%). Longer-term returns remain impressive, with five-year and ten-year returns exceeding 700%, far outpacing the Sensex benchmarks.

Promoter confidence appears strong, with promoters increasing their stake by 1.03% in the previous quarter to hold 57.57% of the company. This rising promoter holding is often interpreted as a positive signal regarding future prospects and management’s commitment.

Conclusion: Balanced Upgrade Reflecting Progress and Challenges

The upgrade of Bhilwara Spinners Ltd’s investment rating from Strong Sell to Sell reflects a more balanced assessment of the company’s prospects. Improvements in quality metrics, driven by strong sales and EBIT growth, alongside a fairer valuation relative to peers, have contributed to this positive shift. However, ongoing concerns about profitability, debt servicing capacity, and recent underperformance temper enthusiasm.

Investors should weigh the company’s healthy long-term growth and promoter confidence against its low ROCE, high leverage, and volatile stock performance. While the stock now trades at a more attractive valuation, the Sell rating indicates that caution remains warranted until financial trends and operational efficiencies improve further.

For those considering exposure to Bhilwara Spinners, monitoring upcoming quarterly results and debt metrics will be crucial to reassessing the company’s trajectory and potential for a further upgrade in investment rating.

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